Health care CEOs made $2.6 billion in 2018

https://www.axios.com/newsletters/axios-vitals-3dafd3d8-dd1c-47ed-a1f0-287e7f37fc6f.html?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosvitals&stream=top

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Illustration of George Washington with a stethoscope around his neck.

The CEOs of 177 health care companies collectively made $2.6 billion in 2018 — roughly $700 million more than what the National Institutes of Health spent researching Alzheimer’s disease last year, according to a new Axios analysis of financial filings.

Why it matters: The pay packages reveal the health care system’s real incentives: finding ways to boost revenue and stock value by raising prices, filling more hospital beds, and selling more drugs and devices, Axios’ Bob Herman reports.

By the numbers: The median pay of a health care CEO in 2018 was $7.7 million. Fourteen CEOs made more than $46 million each.

  • The figures were calculated by using actual realized gains of stock options and awards, which are in the annual proxy disclosures companies file with the Securities and Exchange Commission.

The highest-paid health care CEO last year was Regeneron Pharmaceuticals CEO Leonard Schleifer, who made $118 million. A spokesperson said Schleifer “has built Regeneron from a start-up into a leading innovative biopharmaceutical company” and that he “generally holds his option awards until nearly the end of the full 10-year option term.”

  • Pharmaceutical CEOs represented 11 of the 25 highest compensation amounts last year.
  • Executives of medical device and equipment companies that don’t attract as much attention — such as Intuitive Surgical, Masimo, Hill-Rom and Exact Sciences — also were sitting at the top.

Between the lines: A vast majority of CEO pay comes from exercised and vested shares of stock. Salaries are almost an afterthought.

  • But health care executives routinely earned millions of dollars in cash bonuses, based on factors like revenue goals and financial metrics that experts say can be manipulated.
  • Quality of care is either not a factor at all in CEOs’ bonuses at all, or a marginal one.

Details: McKesson CEO John Hammergren received a $4 million bonus for hitting financial targets last year, just as the company was facing a slew of lawsuits over its role in the opioid crisis. McKesson did not immediately respond to questions.

  • Community Health Systems CEO Wayne Smith recorded a $3.3 million bonus even though his hospital chain continued to hemorrhage money. His bonus was heavily weighted by an adjusted metric that made CHS look profitable, and none of his bonus was tied to patient outcomes. CHS did not respond.

Worth noting: The analysis does not include compensation from not-for-profit hospital systems, because their 2018 tax filings have not been released yet.

 

 

 

Building the bench: Hospitals and health systems prepare for boomer retirement wave

http://www.modernhealthcare.com/article/20180505/NEWS/180509944

 

TriHealth asked its vice president of finance to shadow executives at an affiliated health system.

Sending a senior executive off-site to expand his perspective was part of the Cincinnati-based health system’s leadership institute, which aims to develop the skills of some 1,000 administrative and physician executives and prepare them for new roles.

While many executives move around within their organization’s network, the approach aimed to expose the employee—who had spent much of his career at TriHealth—to another corporate culture and operations.

“We obsess about spending $2 million on a CT scanner, but we can’t find a way to spend $10,000 on investing in our leaders,” said TriHealth CEO Mark Clement, who launched the system’s leadership institute about ½ years ago. “I would argue that investments on improving talent within our organization produce dividends far greater than a piece of equipment.”

For many providers, it’s the end of an era. Hospital, health system and physician group executives are seeking new leaders. They are prompted by an exodus of top healthcare executives, a generational transfer of power highlighted by the departures of senior managers like Dr. Toby Cosgrove, former Cleveland Clinic CEO; Michael Murphy, CEO of Sharp HealthCare who is retiring in 2019; and outgoing Mayo Clinic CEO Dr. John Noseworthy.

Millennials have claimed the largest share of the U.S. workforce, with 35% of workers in 2017, according to the Pew Research Center. As more boomers eye retirement, providers will look to fill a void of institutional knowledge.

Organizations are actively searching for what’s next and who will take them there. Industry consolidation is accelerating that conversation. But there is wide variation on their approach and level of preparation.

There’s a lot at stake, both from a cultural and financial perspective, said Mark Armstrong, vice president of consulting operations at Quorum Health Resources. Good managers translate to engaged employees, he said.

But only about 33% of U.S. workers are actively engaged in their jobs, and a mere 15% of employees strongly agree the leadership of their organization makes them enthusiastic about the future, according to a 2016 poll by Gallup. The firm estimates that disengaged employees cost the U.S. $483 billion to $605 billion each year in lost productivity.

“Even when systems know someone is retiring, it is interesting how few of them still don’t have an assertive plan in place,” Armstrong said. “Any kind of turnover can be disruptive, especially if there has been a trend of declining performance. It’s not unusual for a ratings agency to have heightened concerned when a CEO leaves.”

Almost every system grapples with a huge retention problem, which can make it difficult to plan ahead, said Alan Rolnick, CEO of Employee Engagement and Retention Advisors. The most costly departures are often experienced nurses, he said.

“It’s not just the cost of replacement but the loss of institutional knowledge,” Rolnick said.

TriHealth’s leadership program highlights potential candidates within the system who could fill upcoming vacancies. It puts executives on a multiyear track that assesses potential areas for improvement and exposes them to systemwide quarterly leadership training sessions and other development opportunities. The company’s vice president of finance, Brian Krause, spent a week at BJC HealthCare in St. Louis, relying on connections TriHealth had with the organization. Krause is also planning on spending some time at the University of Pennsylvania Health System, as well as a few other systems.

Since launching the institute—which is conducted with the help of the consultancy Studer Group—TriHealth’s employee engagement improved from the 26th to the 74th percentile, which has helped the organization generate a 3.5% operating margin—one of its highest margins in recent history, Clement said. Its patient experience scores are also up from the 50th percentile to the 75th, helping to drive an increase in admissions, bucking the national trend.

Ideally, promoting from within will ensure cultural and operational continuity and motivate executives, Clement said. “When you bring new senior executives in from other organizations, it can be a threat to the culture,” he said. “For an organization like ours that has invested a lot of money in building a culture based on value, engaging team members and flattening the organization, it’s often best to promote from within.”

Outside perspectives

Ascension has development programs similar to TriHealth, including quarterly leadership meetings and a series of classes. The St. Louis-based health system pairs its administrators with clinician executives in each of its markets. It shuffles executives within its vast hospital network to provide new perspectives and fill roles in regions where it can be hard to recruit qualified employees.

Ascension also recently launched a diversity inclusion campaign that seeks to cultivate minority leaders.

“The types of leaders are changing,” Ascension CEO Anthony Tersigni said at the American College of Healthcare Executives’ 2018 Congress on Healthcare Leadership in March. “The time for guys like me who started as a hospital operator is passing.”

The CEO of a Fortune 100 company told Tersigni several years ago that he spends about 30% of his time on leadership development. Tersigni, who at the time only spent a fraction of that on cultivating executives, said that interaction completely changed his perspective. Ascension has since partnered with a number of universities to build a better leadership curriculum and management pipeline.

“Disruption in the healthcare industry is not going to come from the hospital across the street, it has been coming from outside the industry,” Tersigni said. “We need to understand how they think, how they act, how they make decisions, because it is a lot faster than healthcare can dream of.”

Renton, Wash.-based Providence St. Joseph in 2017 partnered with the University of Great Falls in Montana, in part, to create a stable pipeline of managers to feed into the integrated health system. The university, which was renamed University of Providence, will include professional and certificate programs for Providence St. Joseph’s more than 111,000 employees.

The health system has also implemented mentoring and leadership development programs that have increased its women executive cohort by 50% over a three-year period.

“Diversity begets diversity,” said Dr. Rod Hochman, CEO of Providence St. Joseph, adding that women and minority leaders will help the system better understand its most vulnerable populations. “We are looking for folks with different perspectives who can help lead us through this time of change.”

Whether the successors are internal or external, establishing a strong executive pipeline requires a proactive and standardized approach, and the board should take the lead, industry analysts said.

A health system should identify the competencies it needs to lead the team going forward and where the gaps are, said Craig Deao, a senior leader at Studer Group. “The three keys leaders of tomorrow need to have are getting people to do things better—performance improvement; getting them to do new things—innovation; and helping people do those things—engagement,” he said.

Managing the process rather than the people will translate to more innovative and engaged employees, according to Rolnick. It starts with communication, he said.

“Today, the average employee of a hospital has no idea of the strategic direction of their organization and what their role is,” Rolnick said. “You have to tell them as much as you can, and be open and honest.”

Beyond employee engagement, executives need to understand how to interact with patients. As the industry adapts to thinking of patients as consumers, that requires a different lens, Deao said.

“People need to understand how to shape behavior and apply concepts of psychology to running the business,” he said.

Help from outsiders

While many systems have traditionally preferred to promote from within, that dynamic is changing as providers place more value on the skills industry outsiders offer. Notably, an executive from a major technology company will join Ascension later this year as its new chief digital officer.

Healthcare is becoming more consumer- and technology-oriented. Health systems are also focusing more on nutrition, transportation, education, fitness and other social factors that influence an individual’s health.

Novant Health, for instance, is launching a new leadership program that looks to train untapped community leaders in Charlotte-Mecklenburg, N.C. The program involves a combination of teaching sessions and mentoring that aims to reach individuals who otherwise wouldn’t have access to programs that hone their leadership skills, said Tanya Blackmon, executive vice president and chief diversity and inclusion officer at Novant.

While there is a significant learning curve, experience in consumer insight, marketing or technology can better equip individuals to tackle healthcare’s current challenges, said David Schmahl, executive vice president of consultancy SmithBucklin and chief executive of its healthcare and scientific industry practice.

“The experience people are obtaining in leadership roles outside the healthcare field is critical,” he said.

The role of healthcare leadership has evolved into a platform used to convey a moral foundation, spanning conversations from racism to gun control. They have to balance their role as an influencer while dealing with budgets, managing their boardrooms, implementing both long-term visions and short-term goals, and maintaining an engaged workforce.

The average tenure of healthcare executives and managers is also decreasing, particularly among CEOs, nurses and physicians, which exacerbates labor shortages. A C-suite executive’s pay is still tied to financial metrics, but quality, safety and patient satisfaction are becoming a more prominent determinant.

While Novant’s initiative isn’t necessarily geared to develop successors, it signifies how the definition of a leader is evolving.

“We are looking at trying to tap talent across all spectrums,” Blackmon said. “We’re not leaving any area untapped.”

 

10 ways compensation committees can best guide executive pay and performance

https://www.beckershospitalreview.com/compensation-issues/10-ways-compensation-committees-can-best-guide-executive-pay-and-performance.html

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As CEO incentive pay packages bring attention to transparency issues in executive compensation, a group of directors and chief risk officers from The Directors and Chief Risk Officers Group published a set of guiding principles for compensation committees around the governance of risk related to pay and performance.

The report aims to give a company’s board of directors and board-level compensation committees guidelines for the governance of risks linked to an organization’s compensation culture.

Here are 10 guidelines for compensation committees to best guide executive pay and performance, according to the report.

1. Compensation committees must fulfill both direct and indirect pay governance responsibilities to define the best compensation culture for the company. Under direct governance responsibilities, CEOs must establish and continually review company-wide compensation philosophy. To fulfill indirect pay governance responsibilities, a company’s executives must ensure adequate resources and processes are in place for the organization’s incentive plans.

2. Committees should emphasize incentive pay for corporate performance when designing and communicating the company’s compensation philosophy. Incentive pay for an individual’s performance must be carefully applied when it is appropriate to fulfilling the individual’s role.

3. A CEO’s total compensation should be driven by how they impact the long-term interests of the company, which includes how effectively the organization takes risk.

4. A company should minimize use of external benchmarking, or the comparison of its statistical data with other organizations in the same industry, for executive pay. Instead, companies should work to incorporate internally-focused pay evaluation for executive pay.

5. Incentive-based compensation should always be considered to be “at risk,” subject to deferral periods and influenced by the company’s long-term performance.

6. Compensation committees must continually use discretion in determining an executive’s final incentive pay package. In this way, committees must make rules for determining these pay packages subject to discretionary override when the compensation culture of the organization appears to be violated.

7. When considering performance reviews and compensation design for an organization’s CEO and individuals in the succession plan, the compensation committee must provide complete transparency to the entire board. This includes the board’s approval of full details of the CEO’s performance and any final awards given to the executive.

8. Compensation committees should obtain public certification that ensures their processes of governing pay risk and compensation philosophy are “fit for purpose,” which entails executing a statement that verifies a company has performed due diligence on its pay governance processes.

9. The members of a company’s compensation committee should have diverse backgrounds and experience, expertise in risk, finance, and management and should cross-populate the company’s risk and audit committees.

10. To ensure proper compensation risk governance, companies must incorporate collaboration, feedback and review among board committee’s and the firm’s social network to maintain a properly established compensation culture.

Hospital CEOs could face new taxes 

The Republican tax overhaul bill also includes a small section that would levy a 20% excise tax on any wages of more $1 million for executives who work at tax-exempt organizations. Guess who’s not thrilled about that? Hospitals.

What they’re saying: The American Hospital Association said it was “concerned” about that provision because “there is already a rigorous process prescribed by the Internal Revenue Service for setting up executive compensation.”

Go deeper: As Axios’ Bob Herman has reported, hospital and health system CEOs command some of the highest salaries in the not-for-profit world.

Healthcare CEO pay climbs steadily since ACA passage

http://www.healthcaredive.com/news/healthcare-ceo-pay-climbs-steadily-since-aca-passage/447772/

Dive Brief:

  • Earnings of healthcare CEOs have continued to grow under the Affordable Care Act (ACA) and the pay packages give them little incentive to rein in spending, a new Axios analysis concludes.
  • Since the ACA was passed in 2010, CEOs of the 70 largest healthcare companies have cumulatively earned a whopping $9.8 billion — or almost 11% more money on average each year. However, because most of the pay is in vested stock, CEOs often base decisionmaking on what boosts stock prices (e.g., bigger sales, more tests and procedures) and not the ACA goals of patient-centered, value-based care.
  • The analysis was based on financial reports from 70 publicly traded U.S. healthcare companies comprising more than $2 trillion in annual revenues. Not-for-profit hospital CEOs were not included.

Dive Insight:

The biggest payout — $863 million — went to John Martin, CEO of biotechnology company Gilead Sciences, according to the analysis. Other takeaways include:

  • Just four of the 113 healthcare CEOs in the analysis were women
  • 11 of the top 20 top earners were CEOs of pharma and drug-related companies;
  • CEOs earned a little less as a whole last year versus 2015 due to market uncertainty over the presidential election.

Rising salaries are drawing increased scrutiny and some pushback. In April, North Carolina lawmakers approved a bill that would bar compensation for CEOs of behavioral health managed care organizations from exceeding by more than 30% the average salary of other behavioral health managed care businesses in the state. The bill seemed targeted at Cardinal Healthcare Innovations CEO Richard Topping, whose salary was $435,000 more than the average salary for a managed care organization in the state.

Salaries of executives at nonprofit organizations have also been growing. According to a Wall Street Journal report in March, many nonprofits are embracing salary strategies used in the for-profit world and offering packages totaling more than $1 million, with possibility of bonuses and deferred payments. In 2014, about 75% of nonprofit pay packages totaling $1 million or more went to healthcare executives.

In Massachusetts, in fact, pay for hospital CEOs outpaced state health spending. The largest compensation package went to Elizabeth Nabel, president of Brigham and Women’s Hospital, who received $5.4 million in 2014, up 119% from the previous year. By contrast, overall healthcare spending in Massachusetts rose 4.8% that year.

In an analysis earlier this year, Axios found that Sutter Health CEO Patrick Fry gets paid the most per patient stay ($6.88 a day) among the 20 largest hospital systems. Greenwich Hospital CEO Norman Roth earned the most ($56.40 a day) among other studied hospitals.

https://www.axios.com/the-sky-high-pay-of-health-care-ceos-2442398819.html

 

Nonprofit salaries for healthcare executives on the rise

http://www.healthcaredive.com/news/nonprofit-salaries-for-healthcare-executives-on-the-rise/437566/

Dive Brief:

  • Salaries for employees of nonprofit organizations, which includes some hospitals and health systems, were up about a third in 2014 from 2011 levels, The Wall Street Journal reported.
  • Nonprofit organizations have adopted salary strategies implemented in the corporate world and often offer packages totaling more than $1 million with eligibility for bonuses and deferred payments.
  • About 75% of nonprofit compensation packages delivering $1 million or more annually in 2014 went to people in healthcare positions.

Dive Insight:

The largest nonprofit compensation package discovered by The Wall Street Journal analysis went to Anthony Tersigni, president and CEO of Ascension, a hospital operator based in Missouri. He received a total of $17.6 million.

Compensation provided by hospitals correlated more with the size of an organization, location, and academic status, according to a 2013 study published in JAMA on salaries for 1,877 CEOs at 2,681 hospitals. The average CEO earned about $600,000 per year, but the average salaries for CEOs of small rural hospitals were just $118,000 while CEOs at top teaching hospitals earned an average of about $1.7 million.

The Wall Street Journal analysis reflect results from the JAMA study. While CEOs of urban teaching hospitals tend to earn more, compensation can vary widely. For instance, the chief executive of Mercy Health System, which had around $1 billion in operating revenue in 2014, earned about $8 million, Meanwhile, Catholic Health Systems collected about 15 times as much in 2015 and paid its CEO half as much.